Canadian Steps In to Lead Bank of England

LONDON — During the darkest days of the financial crisis in Britain, a powerful outside voice pressed top government officials to take immediate and authoritative action.

It was Mark J. Carney, who was then the more or less anonymous head of Canada’s central bank. An increasingly influential, if not discreet, troubleshooter on global financial matters, Mr. Carney had become an active participant at Downing Street’s crisis huddles in late 2008. He argued that giant entities like Royal Bank of Scotland posed a danger not only to their home country but the financial system as a whole.

Mr. Carney’s advice was to consider the institutions those banks were borrowing from and lending to, recalled Alistair Darling, who was the British chancellor of the Exchequer, or finance minister, at the time. “It gave us a bigger picture that the supervisory authorities did not have at the time,” Mr. Darling said.

Britain would later become the first major country to inject capital directly into its ailing banks. And while full credit for the decision goes to Mr. Darling and the prime minister at the time, Gordon Brown, Mr. Carney played a crucial role.

On Monday, Mr. Carney, 48, will no longer be an adviser but the man in charge. He is to step into the Bank of England’s palatial home on Threadneedle Street to take on one of the biggest roles in the future of Britain’s economy and banking sector.

Mr. Carney, who is Canadian, is succeeding Mervyn A. King as the governor of the Bank of England and is hailed as the first non-British governor in the bank’s 319-year history. But as Mr. Carney prepares to take on his new role some question if the task at hand may be beyond him, or any central banker, for that matter.

Sluggish demand for goods from the troubled euro zone, Britain’s largest export market, is keeping many companies from investing in new machinery or hiring staff. And the austerity measures prescribed by the current chancellor, George Osborne — which are likely to continue through 2018, much longer than initially planned — have squeezed disposable income as consumer prices keep rising. At the beginning of the year, Britain barely avoided a triple-dip recession.

“We’re not exporting enough and not consuming enough, and monetary policy alone can’t fix that,” said Robert Wood, an economist at Berenberg Bank. “Mr. Carney has been built up as Superman, but clearly there’s no way he can live up to the hype,” Mr. Wood said. “He can’t single-handedly rescue the economy.”

Mr. Carney declined an interview request.

Young and dynamic — he was a goalie on Harvard University’s varsity hockey team — Mr. Carney brings with him attributes not usually found among the dowdy breed of central bankers. While Mr. King once said his ambition was for monetary policy to be boring, Mr. Carney has been overheard using phrases like “monetary activism” and “escape velocity.”

An ability to make himself seem indispensable lies at the root of Mr. Carney’s extraordinary rise, accomplished in just under 10 years, from a position as a midlevel investment banker at Goldman Sachs to the top of the Bank of England.

It was not until March 2008, when Mr. Carney became the first central banker to aggressively lower interest rates in his country, that his current reputation as the Superman of central bankers began to take form. He then pledged to keep rates low for a year — at 0.25 percent — providing some certainty to borrowers in the chaos of the financial crisis.

For Mr. Osborne, it was that combination of style and substance that made Mr. Carney “simply the best, most experienced and most qualified person in the world” to lead the Bank of England. So eager was Mr. Osborne to hire Mr. Carney, who has a doctorate from the University of Oxford, that he chased him across continents to ask him more than once and to promise one of the highest pay packages of any central banker in the world — £480,000, or $730,000, in salary, plus a generous housing allowance.

Under Mr. King, the Bank of England injected money into the economy by buying £375 billion in assets, mainly government bonds. To get banks to lend again, the central bank started to offer cheap credit to banks, but that stimulus move had little result. Mr. King, arguing that more needs to be done to revive growth, has been voting for more asset purchases on the monetary policy committee but has been outvoted every month since February.

Mr. Carney is widely expected to face a similar situation when he attends his first monthly interest-rate-setting meeting Wednesday. “He’s a very persuasive man,” Mr. King said of Mr. Carney in a public committee hearing last Tuesday, “but even he is only one vote on the monetary policy committee.” The committee has nine members, including the governor.

Photo

Mark J. Carney, left, with Mario Draghi, the European Central Bank chief, in May. Mr. Carney is taking over Britain’s central bank, the first non-British governor in its 319-year history.Credit
Pool photo by Alastair Grant

A charismatic new governor might yet persuade more Bank of England policy makers to stoke the stimulus. But even if he does, when it comes to reviving the dormant British economy, a central banker’s powers are limited, said John Van Reenen, director of the Center for Economic Performance at the London School of Economics.

“His hands are tied,” Mr. Van Reenen said. “Until we really get our banking system in order, and until we get demand going again by increasing infrastructure spending, there’s only so much he can do.”

That is part of a larger point raised this year by Jaime Caruana, the general manager of the Bank for International Settlements, in a London speech. Monetary policy can buy time to enact the necessary structural changes and repairs, Mr. Caruana said, but it cannot substitute for them.

“If a medicine does not work as expected, it’s not necessarily because the dosage was too low,” he said in May, warning that prolonged low interest rates and unconventional policies could have unpleasant results.

Mr. Carney might disagree. At the World Economic Forum in Davos, Switzerland, in January, he said that monetary policy was not maxed out and that “there continue to be monetary policy options in all the major economies.” He went on to cite the need for better public communication, including Federal Reserve-style guidance on interest rates, and other unconventional instruments.

He applied such guidance while at the Bank of Canada and is proud that it “has consistently achieved its inflation target, while the Canadian economy has grown jobs and output at the fastest pace in the G-7,” Mr. Carney told an impressed group of British lawmakers at a parliamentary committee hearing in February, referring to the Group of 7 major economies.

But some analysts, including Mr. Van Reenen, said that luck had played a role in Mr. Carney’s run in Canada. The country’s banks were in a more stable position before the crisis, and the Canadian economy is rich in oil, natural gas, minerals and other commodities.

Some warned that Mr. Carney’s actions had worked even too well and that the low interest rates had created a property boom that might yet damage the central banker’s reputation.

“Why did Canada have such a good crisis? Because they have not had a crisis yet,” said William R. White, a Canadian economist who gained renown during his time at the Bank for International Settlements for having warned of the 2008 crisis.

Given Britain’s economic gloom, more radical action might be needed. Some analysts argue that splitting up the troubled commercial banks to separate the bad assets would be the only way to get those institutions to lend again. Under an expanded scope of duties for the Bank of England, since a regulatory overhaul in April, Mr. Carney will also be responsible for ensuring the stability of the banking system and that institutions are well-capitalized.

His Goldman pedigree enables him to talk the talk of bankers, so he is not cowed by them, as he showed two years ago when he and the JPMorgan Chase chief executive, Jamie Dimon, locked horns over the need for higher capital requirements for banks.

But some banking experts wonder whether his get-tough approach will help an economy that is reliant on large universal banks.

Besides, splitting up the banks would ultimately be a decision for Mr. Osborne, who in June requested a review into the viability of splitting up Royal Bank of Scotland, which remains majority owned by the government after its bailout in 2008.

“Mr. Osborne has appointed a brilliant central banker,” said Stephen King, an economist at HSBC. “On his own, however, Mr. Carney won’t turn the economy around.”

Referring to the fictional material that is Superman’s ultimate weakness, he said that Britain’s exposure to troubled European economies and Mr. Osborne’s political challenges ahead of the next general election in two years might prove to be Mr. Carney’s Kryptonite.

Correction: July 2, 2013

An article on Monday about Mark J. Carney, a Canadian who is to become governor of the Bank of England, attributed an erroneous distinction to Mr. Carney’s pay package. His annual salary of $730,000 is among the highest for any central banker, but it is not “by far the highest.” (The governor of the central bank of Australia receives $769,000 in annual salary.)

A version of this article appears in print on July 1, 2013, on page B5 of the New York edition with the headline: Canadian to Take Reins at Bank of England as the Economy Treads Water. Order Reprints|Today's Paper|Subscribe